Why Interest Rates Can't Go Much Lower, In Five Charts

Japan and Europe have been operating with negative interest rates for going
on a year now, and this is what they have to show for it:

For readers who aren't completely clear about the GDP charts, they're measuring
the annual rate of change, so 0.4% means an economy is growing at a rate of
less than ½ of 1%. This is about as close to zero as it's possible to get without
enduring actual shrinkage. Clearly the new-age policy mix of negative interest
rates and massive central bank bond buying isn't working.

Mainstream economists want to up the ante by lowering rates even further.
But there are reasons to believe that not only won't such a policy work but
that it won't be tried. For one thing, negative rates are already killing the
banks. In Japan, for instance:

(Reuters) – Japan's financial watchdog estimates that negative interest
rates under the Bank of Japan's monetary easing policy will reduce profits
for the country's three big banks by at least 300 billion yen ($2.96 billion)
for the year through March 2017, the Nikkei business daily reported on Saturday.

The Financial Services Agency (FSA) expressed concern to the BOJ regarding
the situation as it sees reduced profits weakening the banks' ability to
extend loans, the Nikkei said.

According to FSA estimates, Mitsubishi UFJ Financial Group Inc's profit
will fall by 155 billion yen. Sumitomo Mitsui Financial Group Inc's profit
will be reduced by as much as 76 billion yen and that of Mizuho Financial
Group Inc will be cut by 61 billion yen.

If the BOJ was to take interest rates deeper into negative terrain, the
agency reckoned that the banks would suffer substantial further drops in
profit as their interest rate income would suffer.

In Germany, Deutsche Bank is so badly run that teasing out the effects of
any one problem isn't easy. But negative interest rates do seem to be in the
mix. From a recent Zacks Research report:

Profitability growth of Deutsche Bank, one of the largest financial institutions
in Europe and the world, as measured by total assets (€1.80 trillion as of
Jun 30, 2016), remains threatened by a stressed operating environment with
negative interest rates, slow growth of the European economy and global
headwinds. Management continues to see a challenging revenue environment
in 2016, specially post Brexit vote.

Last month the German banking giant reported net income of €20 million ($22.6
million) for the second quarter of 2016, significantly down on a year-over-year
basis. Income before income taxes came in at €408 million ($460.7 million),
down 66.8% year over year. Results were adversely impacted by reduced revenues
and higher provisions, partially offset by lower expenses which resulted
from reduced litigation as well as compensation costs.

DEUTSCHE BK AG Price

As the article on Japanese banks noted, more negative interest rates will
suck even more life from the banks. Since 1) they're already on life support
in a lot of cases and 2) even in their currently diminished state they remain
immensely powerful politically, it's highly unlikely that we'll see -3% yields
on government bonds in this cycle.

But if not that, what? Banks are shrinking around the world – as are pension
funds and insurance companies and everyone else who depends on positive fixed
income returns. National economies aren't growing, while national debt burdens
continue to soar. Staying the course in this case means drifting over the falls.

So the next round of experiments will probably feature bigger deficits and
more aggressive public hand-outs. Which – since these have already been tried
and failed – doesn't give much hope for the future.

John Rubino edits DollarCollapse.com and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar
and How to Profit From It, and How to Profit from the Coming Real Estate
Bust. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.